This misalignment results in appraisals simply becoming a ritual of fault-finding, political bickering and pay negotiations, rather than a dialogue based on mutual trust and respect which can foster performance excellence.

A poor appraisal system directly affects employee morale and engagement.

Performance management systems are meant to manage an optimal level of performance at three levels — the organization, the team and the individual. In reality, however, companies use this system only to incentivize performance narrowly defined as meeting of targets within a certain role, closely entwined with the targets of the team. Overall business targets are juxtaposed on top of this. Employees end up with too many goals, and companies make little effort to incentivize behaviors and values that lead to high performance in the long-term.

Dynamic and flexible systems are therefore called for. Companies can improve their traditional appraisal systems by addressing some key issues.

Goal-setting Does the organization’s goal-setting exercise take into account the business complexity, the criticality of an individual’s role and the individual’s personal stretch potential? Often, goal setting is largely a top-down, unilateral process, with employees having little say about strategic organizational goals. This leaves little scope for individual inspiration. We believe employees’ motivation can be tapped by including them in discussions about the team and the organization’s goals.

Vital Few Too many goals or “key result areas” for employees spread across a diverse number of themes and roles usually indicates poor focus. Companies should focus on the vital few goals that are aligned with the organization’s short and long-term objectives. In addition, companies should clarify how these goals are defined and measured. Suppose the goal is achieving bottom-line growth. For a department that doesn’t directly generate revenue, such as the finance department, the company can say performance will be judged using parameters such as how well the procurement expenses were managed.

Instead of having a nebulous goal like “Let’s become customer centric”, make the goal specific, time-bound, and list key actions that will make it measurable. That’s what you call a smart goal.

Behavioral change During employee townhall meetings, companies often stress the need for initiative and innovation. But an employee may end up with a poor performance rating if in the process of demonstrating those virtues, he or she has missed defined business targets! Organizations that want to drive behavioral changes need to show their commitment to these goals by giving them appropriate weight in the performance appraisal system. They should define how these behavioral goals are measured, so that employees know exactly where they stand if they come up with new ideas or spend time on innovative projects. Finally, companies need to give employees adequate time to demonstrate these behaviors.

Appraisal frequency Companies have to differentiate high performers and high-performing teams in a business environment that is constantly changing. When companies are pursuing a constantly moving target, is it fair to evaluate an employee’s performance against goals that are frozen at the beginning of the year? We believe companies need to have at least two or three review sessions. One could be to review employee’s annual performance, while another could be held in conjunction with the business planning and budget team to set targets for the next year. This way the processes of setting strategic goals and evaluating employees receive the attention they independently merit.

Flexible rating scale Globally, companies rely on a standard bell curve which rewards performance partly by comparing the individual’s performance with his or her peers. While this tool works well in a normal year, organizations should build flexibility into their appraisal systems to reflect changes in the business environment. Typically, companies follow a four-point scale for employee ratings: 10% of the employees get a rating of one (the lowest), 40% get a rating of two or three, and only 10% get the highest, four-point rating. These percentages are rarely subject to change. We suggest that organizations tweak their distributions depending on the business environment. Use the standard distribution if the company is on target. But if the targets are exceeded either by the company or a particular unit, then the company should skew its performance curve so that more employees can benefit from the good performance. For instance, in a good year, companies can use a distribution of 5-30-45-20. If one unit merits a three rating and another a four, then support functions like finance and human resources can be given a weight of 3.5, and their staff rated accordingly. Alternately, if the company does not do well, it can shift its distribution downward to 15-50-30-5.

Keeping it real Even the most rigorous systems cannot replace leadership, wisdom and prudence. The company’s board has to take ownership of the performance management process by asking questions like: are the goals fair? Can we also reward work on a “best effort” basis rather than only on outcomes, so that initiative and motivation don’t get squashed? Can we reward individuals for demonstrating behaviors emblematic of organizational values? Can we recognize employees for demonstrating everyday leadership through a commitment for learning and development?

Companies should demonstrate a commitment to their employees by continuously revamping and improving their performance management systems to tie them closer to reality. More than anything else, this will show employees that the company cares.

Courtesy of Mercer

Nishchae Suri

What are common flaws in performance appraisals? Share your thoughts in the Comments section.

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